AngelGate Goes Nuclear, Startups Get the Fallout

Just when you thought the AngelGate fuss — which Mike Arrington of TechCrunch touched off earlier this week with a blog post exposing a meeting of “super-angels” — couldn’t get any more emotionally fraught, legendary Silicon Valley investor Ron Conway upped the ante late Thursday with an email to some of the investors who were at the meeting, calling their discussions “despicable and embarrassing for the tech community.” Among other things, the long-time angel investor asked those at the meeting to remember who they are supposed to be working for, namely the founders of the startups they are investing in.

This is a message we tried to get across in a recent post as well, and a point that several other prominent angels and investment funds such as True Ventures (see disclosure below) have also made in blog posts since the AngelGate affair first blew up. True partner Jon Callaghan said it well in a post entitled simply “Founders Come First.” Angel investor Chris Yeh echoed this perspective in a post, saying “the last thing any of us — angel, VC, or entrepreneur — need is a conflict that will get in the way of what we’re all trying to do: Create great products and build great companies.” And entrepreneur Micah Baldwin of Graphic.ly wrote that “the best investors know that the moment you put the potential of your return ahead of the potential of your entrepreneurs, you lose.”

Dave Pell, meanwhile — an occasional angel investor and advisor to startups since the early 1990s — also made some great points in a post about advice he has given to startups, including how they should approach venture investment, from angels or anyone else. His advice includes a suggestion (probably not a popular one among super-angels) that they avoid doing so if at all possible:

The best advice I’ve ever given a founder during a pitch is: Don’t take any outside investment from me or anybody else. Most of the start-ups that are really products being built to flip to one of the big web companies are better off bootstrapping it than taking on outside money and all the hassles and headaches that come with that decision. If you can swing it without investors, do it.

It’s no secret that a big part of what led to the secret meeting of super-angels — where the topics of discussion (allegedly) were things like how to push startup valuations down — is the current bubble-like atmosphere around startups and seed investing in Silicon Valley. As Liz has pointed out, it seems as though every open house or launchpad event draws hundreds of angel and VC funds, with some offering YCombinator startups financing before the ink is even dry on the napkin where they sketched out their idea.

Dave McClure, an angel investor and startup advisor — who came in for particular criticism in Conway’s email — is just one of the “super angels” who have raised (or are trying to raise) large funds over the past few months. McClure’s 500 Startups has filed to raise $30 million, former Google executive Chris Sacca has raised over $20 million for his Lowercase Capital group of funds, and another former Googler, Aydin Senkut, has raised $40 million for his Felicis Ventures fund — and there are new funds appearing every few weeks, it seems. That much money chasing a relatively small startup field is bound to lead to pressure on prices, and to pressure on relationships between angels and traditional VCs. Some, like Kauffman fund advisor Paul Kedrosky, have even argued that there is a super-angel bust coming.

Whether there are too many angels is a moot point in some ways. As with other investment cycles, the number of investors tends to rise and fall. But without taking sides, Conway’s central point is a good one — if the in-fighting and/or attempts at collusion among angels (which Union Square VC Fred Wilson said recently has always been around) gets out of hand, then the ones who ultimately suffer are the founders and startups that are supposed to be at the heart of the entrepreneurial ecosystem (and some recent analysis shows the U.S. has some work to do in that area). As Clay Loveless of Mashery said about the AngelGate blowup: “I’m glad I’m not launching a startup in the midst of all this.”

That’s not to say Silicon Valley and a handful of “super-angels” are the entire startup ecosystem — they clearly are not. But they help set the tone and drive attention and funds towards startups of all kinds, and friction in that process does no one any good. In closing, we leave you with Hitler’s perspective on the whole fracas.